Loan Against Insurance Policy vs Traditional Loans

Financial emergencies often demand quick liquidity, but not all loans are equal when it comes to ease, cost, and flexibility. Understanding the difference between a loan against insurance policy and traditional loans helps you make a more informed borrowing decision.

Did you know? You can borrow against your life insurance policy without surrendering it, keeping your long-term benefits intact.

Unlock the value of your insurance policy for instant liquidity. Apply for a loan against insurance policy

A loan against an insurance policy lets you borrow funds by pledging your policy as collateral. It’s ideal when you need urgent liquidity but wish to avoid selling investments or redeeming long-term savings.

Key highlights:

• Available only against ULIP with a surrender value.
• You continue to enjoy life cover and other policy benefits.
• Interest is charged only on the borrowed amount, not the entire policy value.
• Loan amount depends on the surrender value and the loan-to-value (LTV) ratio set by the lender.
• Simple documentation and faster approvals compared to traditional loans.

Eligibility is generally straightforward, as the loan is secured against your policy.

• The insurance policy must be a ULIP plan.
• The policyholder must be the borrower.
• The policy must have a surrender value (usually after 3 years of premium payments).
• The policy should not be lien-marked by another lender.
• Minimum and maximum loan amounts depend on the policy type and value.

The loan-to-value (LTV) ratio typically ranges between 80% of the surrender value.

• Loan amount: Based on the surrender value of your policy.
• Interest rate: Typically lower than that of unsecured loans, as it is secured.

Enjoy lower interest rates and faster processing with a loan against insurance policy

Repayment terms are designed for flexibility. Borrowers can choose interest-only payments or repay in instalments, depending on the lender’s policy.

• You can repay anytime during the policy term.
• If unpaid, the amount is deducted from the maturity or death benefit.
• Defaulting may reduce policy value or risk lapse if dues remain unpaid.
• Some lenders allow partial prepayment without penalties.

Other loans refer to common borrowing options such as personal loans, car loans, or home loans, where the borrower receives a lump sum amount for various needs. They are widely available but often come with stricter eligibility checks and longer processing timelines.

• Can be secured (home loan) or unsecured (personal loan).
• Require detailed income proof, credit history.
• The interest rate depends on creditworthiness and loan type.
• Offer fixed or flexible repayment structures.

Different traditional loans cater to different needs, but most involve lengthy documentation and eligibility checks.

Common examples:

• Personal loans – Unsecured, quick, but at higher interest rates.
• Home loans – Long-term financing secured by property.
• Car loans – Secured loans for vehicle purchase.
• Gold loans – Secured by physical gold, with moderate interest rates.
• Business loans – Offered for working capital or expansion, with variable terms.

Traditional loans vary widely in terms of cost and timelines.

Key factors:

• Loan amount: Depends on income, credit score, and collateral (if any).
• Interest rate: Usually higher for unsecured loans (personal loans, business loans).
• Processing time: Can take 3–10 working days due to verification and credit checks.
• Documentation: Requires proof of income, employment, and KYC

Repayment terms are fixed, typically through  EPIs/ instalments (Equated periodic Installments).

• Tenure: Ranges from 12 months to 30 years, depending on loan type.
• Default risk: Late or missed payments affect your credit score.
• Prepayment penalties: Some lenders charge fees for early closure.
• No policy-backed security: In unsecured loans, default leads to legal or credit consequences.

Here is how both options compare on key parameters:

Loan against insurance policy

Advantages:

• Lower interest rates.
• Quick access to liquidity.
• Policy continues to provide coverage.
• Simple documentation.

Disadvantages:

• Only available for eligible policies.
• Non-repayment may reduce policy benefits.
• Limited to the policy’s surrender value.

Other loans

Advantages:

• Wide range of loan types.
• Suitable for varied financial needs.
• Longer repayment tenures.

Disadvantages:

• Higher interest rates for unsecured loans.
• Time-consuming approval process.
• May impact credit score if repayment falters.

Borrow smartly by pledging your policy instead of taking an expensive loan. Explore loan against insurance policy.

Choose a loan against insurance policy if:

• You have a ULIP or endowment policy with a good surrender value.
• You need quick liquidity for short-term needs.
• You want to avoid credit score dependency.
• You prefer lower interest rates and minimal paperwork.

Opt for other loans if:

• You do not have an eligible insurance policy.
• You require larger or long-term financing (like home purchase).
• You prefer structured installments and long repayment periods.
• You have a strong credit profile and stable income.

Both loan against insurance policy and traditional loans have their place, depending on your financial goal and urgency. If you’re seeking quick access to funds at lower rates with minimal hassle, borrowing against your insurance policy is often the smarter choice. Traditional loans, while broader in scope, demand more documentation and can take longer to process.

Secure quick liquidity with minimal documentation through a loan against insurance policy, a simple, affordable way to meet urgent financial needs.